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Edward Kleinbard

New “solution” to debt-ceiling standoff: IOUs?

However, there is a plausible course of action, one that the president should publicly adopt in the coming weeks as his contingency plan should debt-ceiling negotiations falter. He should threaten to issue scrip — “registered warrants” — to existing claims holders (other than those who own actual government debt) in lieu of money. Recipients of these I.O.U.’s could include federal employees, defense contractors, Medicare service providers, Social Security recipients and others.

The scrip would not violate the debt ceiling because it wouldn’t constitute a new borrowing of money backed by the credit of the United States. It would merely be a formal acknowledgment of a pre-existing monetary claim against the United States that the Treasury was not currently able to pay. The president could therefore establish a scrip program by executive order without piling a constitutional crisis on top of a fiscal one.

To avoid any confusion with actual Treasury debt, and to be consistent with the law governing claims against the United States more generally, the scrip would not pay interest in most cases. And unlike debt, it would have no fixed maturity date but rather would become redeemable in cash only when the secretary of the Treasury was able to certify that there’s enough money available in the Treasury’s general fund to cover it.

To avoid any confusion with actual Treasury debt, and to be consistent with the law governing claims against the United States more generally, the scrip would not pay interest in most cases. And unlike debt, it would have no fixed maturity date but rather would become redeemable in cash only when the secretary of the Treasury was able to certify that there’s enough money available in the Treasury’s general fund to cover it.

This assumes that someone will actually accept that IOU for payment. My guess is that someone owed a lot of money by the government for services rendered receiving an IOU for payment might stop rendering service. That IOU doesn’t pay employees or put groceries on the table.

LOL. 2 year T-notes only pay 0.24% and 6 month T-bills pay 0.07% “interest” – both exceedingly NEGATIVE in terms of real interest rates. German notes had gone NEGATIVE in nominal rates … so I guess they weren’t “debt” since you had to PAY the German government to borrow money from you.

Debt is debt. Of course, this is all from the people who claimed that Greece forcing 60% haircuts on its debt-holders wasn’t “default” …. since it was “voluntary”.

When the language is gone, there is truly nothing left to civilization since there is nothing left to contracts which are the base and foundation of modern society.